KFA expects to pay the following dividends over the next 4 years: $3.00, $4.00, $5.00, and...

KFA expects to pay the following dividends over the next 4 years: $3.00, $4.00, $5.00, and $6.00. After that, it expects to pay dividends that grow at 4%/year. If the required equity return is 15%, what should be today's share price?

Expert Solution

Current market price today is present value of stock that is equal to present value of dividend received up to 4 Years and Price of stock received at end of 4 Year

Growth rate (g)=	4%
Required rate of return =	15%
Dividned for year 5(D5) = D4*(1+g)
6*(1+4%)=	6.24
Price of stock received at end of year 4 (P4) = Dividend for year 5/(ke-g)
6.24/(15%-4%)=	56.72727273

Calculation of P0 or current market price
Year	Cash flows	P.V.F.@ 15%	Cash flows * PVF
1 (D1)	3	0.8695652174	2.608695652
2 (D2)	4	0.7561436673	3.024574669
3 (D3)	5	0.6575162324	3.287581162
4 (D4)	6	0.5717532456	3.430519474
4 (P4)	56.72727273	0.5717532456	32.4340023
			----------------------
Current value			44.78537325
			----------------------
So, Current price of stock is $44.79

Note : PVF formula = 1/(1+i)^n

For 1 year, 1/(1+0.15)^1 =		0.8695652174
For 2 year, 1/(1+0.15)^2 =		0.7561436673
For 3 year, 1/(1+0.15)^3=		0.6575162324
For 4 year, 1/(1+0.15)^4=		0.5717532456

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jeff jeffy answered 3 months ago

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